COVID-19 Update: The Impact of the CARES Act on Your Retirement Plan

COVID-19 has sparked many changes nationally and caused a large amount of uncertainty. Our mission as trusted advisors is to provide our clients with the proper resources to make the best decisions for their company. One of the most frightening issues during any recession revolves around an individual’s plan to retire and the balance of their 401(k). On March 27th, 2020 the government issued the CARES Act in efforts to aid those financially impacted by this pandemic. Here’s what you need to know about how this impacts your plan and your investments.

What Plan Sponsors Need to Know

The unforeseen impact of  COVID-19 has forced business owners to make tough decisions when it comes to their employees and the company’s overall spending. Here’s what business owners need to know before cutting employee benefit plan contributions:

  • If the plan documents state the match is required or fixed, the wording should be analyzed to determine if you can amend the plan to make it a discretionary match.
  • If a match is required through a collective bargaining agreement, then the employer should reach out to the collective bargaining unit for further information on how to proceed.
  • If the plan is a safe-harbor plan, the company is required to make contributions to the plan in order to continue to be qualified and meet testing requirements. There are two exceptions to the rule that will allow a plan to discontinue a safe harbor contribution, and only one is required to be met:
    • 1) the company is operating at an economic loss or
    • 2) the employees were notified in the prior year that the company may reduce the contribution.

If the decision is made to stop all employer contributions, employers should notify the participants prior stopping the contributions in order to give the participants an opportunity to change their deferral election.

It’s also important to note that with the rise of unemployment during this crisis, it’s important to monitor the number of terminated employees. If a plan has a 20% reduction in their workforce, a partial plan termination is triggered and participants will become fully vested in their employer contributions regardless of vesting schedules. We suggest using legal counsel to determine if participants are terminated or on a leave of absence.

What Plan Participants Need to Know

The CARES Act also makes several changes to retirement accounts/plans, offering investor’s access to funds that otherwise would not be available. Plan sponsors have the option to adopt these new provisions now and amend their retirement plan by January 1, 2022. The provisions discussed below are optional for qualified individuals.

  • A qualifying participants must meet at least one of the following :
    • Diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention
    • Spouse or dependent is diagnosed with SARs-CoV-2 or COVID-19
    • Experience adverse financial consequences as a result of being quarantined because of the virus or disease, being laid off or furloughed or having work hours reduced because of the virus or disease, being unable to work due to lack of child care because of the virus or disease, closing or reducing hours of a business owned or operated by the individual because of the virus or disease, and other factors as determined by the Secretary of the Treasury.

Coronavirus-Related Distributions

Under the CARES Act, a plan sponsor may optionally choose to allow certain eligible participants to take penalty-free distributions up to $100,000. The 10% penalty is waived and tax does not have to be withheld from the distribution. The individual can split the income over three years on their tax return to pay the tax.

Plan Loans

The CARES act also temporarily increases the plan loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance. Previously loan limits were $50,000 or 50% of a plan participant’s account balance. The new loan limits apply to loans taken during the 180-day period beginning on March 27, 2020 through September 23, 2020. Loan payments scheduled on existing loans to occur between March 27, 2020 and December 31, 2020 can also be suspended

Borrowing money from your 401(k) for short-term needs is typically not recommended, but in a crisis, it can be a better strategy than taking out personal loans or credit card debt. While you will still owe interest on the loan, it pays back into your own retirement account.

Required Minimum Distributions

One of the biggest retirement-related change the CARES Act made was suspending all required minimum distributions (RMDs) for IRAs and DC plans, including 401(k), 403(b), and 457(b) plans. The waiver does not apply to defined benefit plans. If you have already taken an RMD for 2020, you may be able to re-deposit the money into an IRA to relieve the tax burden in 2020.  This allows retirees to leave their investments alone for a year and recover from the market downturn.

Our Recommendations

Plan Sponsors:

  • Carefully review your retirement plan’s procedures and plan administrator’s constraints to determine if any changes are required in order to implement the applicable CARES Act provisions.
  • Be sure to prepare proper communications to plan participate, notifying them of any plan changes as a result of the CARES Act and any additional steps that participants will have to take in order to take advantage of any such changes.

Plan Participants:

  • The provisions above require the employer to make amendments to the company retirement plan. If you are an employee and may be interested in any of these, we recommend that you speak with your employer.
  • Our recommendation is to hold steady during downturns in the economy and only remove amounts from your retirement fund when it is absolutely needed. It may be a shock to see statement balances dwindling and usually gut reactions are quick to stop contributing or pull money out. The best option is to stay the course and weather the storm.
  • Those who have not been heavily impacted by the COVID crisis should consider increasing their contributions into their plan in order to take advantage of the low stock prices.

If you are a plan sponsor or plan participant, and have questions about what your next step should be for your retirement plan or account, please reach out to us for guidance and advice.